What are FGN Bonds
FGN Bonds are debt securities (liabilities) of the Federal Government of Nigeria (FGN) issued by the Debt Management Office (DMO) for and on behalf of the Federal Government. The FGN has an obligation to pay the bondholder the principal and agreed interest as and when due. When you buy FGN Bonds, you are lending to the FGN for a specified period of time. The FGN Bonds are considered as the safest of all investments in domestic debt market because it is backed by the ‘full faith and credit’ of the Federal Government, and as such it is classified as a risk free debt instrument. They have no default risk, meaning that it is absolutely certain your interest and principal will be paid as and when due. The interest income earned from the securities are tax exempt.
Why Federal Government of Nigeria issue Bonds?
The Federal Government of Nigeria (FGN) issues Bonds for the following reasons:
• To finance government fiscal deficits in a non-inflationary and sustainable manner.
• To enhance fiscal discipline of the Government.
• To refinance maturing debt obligations of the Federal Government.
• To establish benchmark yield curve, this serves as reference for pricing bonds issued by other bodies, especially the private sector issuers.
• To develop and ensure liquidity in the domestic bond market on a sustainable basis.
• To enhance and deepen the savings and investment opportunities of the populace.
• To sustain the development of other segments of the Bond market.
• To diversify government financing sources.
Special Purpose Bonds
Special Purpose FGN bonds are bonds issued to meet specific needs of the federal government, such as special purpose bonds issued to selected banks for settlement of N75 billion pension arrears in 2006, five deposit money banks participated in the private placement arrangement. Others include Bonds issued for the funding of Abuja Express ways (Airport Road and Kubwa) and to settle Local Contractors Debts.
Features of FGN Bonds
- To finance government deficits in a non-inflationary and sustainable manner
- To enhance fiscal discipline and for the management of monetary policies
- To restructure the existing debt stock of short term debt to longer term obligations
- To establish a benchmark yield curve, which acts as a reference for pricing other bonds issued by other bodies
- To develop the domestic bond market on a sustainable basis
- To enhance and deepen the savings and investment opportunities
Special Purpose FGN Bond
Special Purpose FGN bonds are bonds issued to meet specific needs of the federal government. For instance, following the approval of Mr. President, special purpose bonds were issued to selected banks for settlement of N75 billion pension arrears in 2006. Five deposit money banks participated in the private placement arrangement. In addition, in 2006 FGN floated bonds for the payment of debt owed to local contractors worth N91.7 billion. Recently, FGN indicated interest to raise funds through bonds for funding specific projects such as Methanol plant, revival of textile industry, terminal wages of workers, building of infrastructural facilities, etc.
Features of FGN Bonds
- Denomination: minimum subscription of N10,000.00 + multiple of N1,000.00 thereafter.
- Yield: – Interest payment
- Fixed interest rates: Most FGN bonds have fixed interest rates which are paid semi-annually.
- Floating interest rates: Some FGN bonds (e.g. 3rd & 4th tranches of the 1st FGN bonds) have floating rates of interest which fluctuates around a reference rate(NTB rates) on the basis of specified parameters.
- There are also zero-coupon bonds(not yet in issue in Nigeria) whereby both interest and principal are repaid at the final maturity date of the bond.
- Tenor: Minimum of two (2) years. There are bonds with maturities of 3. 5, 7 and 10 years, in issue and for the future we may have bonds with maturities of 15, 20,30 years or more.
- Default Risk: FGN bonds as a sovereign debt are the safest investment instrument. Default risk is nil. The Government always pays what is due to subscribers on the agreed date.
Debt Management Office Market Wide Development Initiatives
A. The Nigerian Debt Market
Prior to the establishment of the Debt Management Office (DMO) in 2000, Nigeria’s public debt was managed by a myriad of Government Agencies in an uncoordinated manner. This diffusion created systemic and structural problems that brought about serious strain on the country’s debt portfolio and economic growth. The establishment of the DMO marked the beginning of the institutionalization and professionalization of public debt management in Nigeria. In the DMO’s continuous efforts to strategically develop and deepen the FGN Bond market the following initiatives, amongst others, were undertaken:
i. The diversification of holding structure of FGN securities away from the dominance of the CBN, such that the private sector now holds nearly all Government Securities;
ii. The regular issuance of bond in the primary market and the development of active Secondary market for FGN Bonds;
iii. The streamlining and restructuring of the different types of debt instruments through tenor elongation and establishment of sovereign yield curve of 3 months to 20 years;
iv. The appointment of Primary Dealers Market Makers (PDMMs) in 2006: the sustained activities of the PDMMs, such as the provision of a two-way-quotes system has resulted in the creation of a vibrant and liquid secondary market in FGN Bonds;
v. The introduction of Market-based approach to raising finance in the domestic debt market, to meet government’s borrowing needs at a minimal cost and prudent degree of risk; and,
vi. The appointment of a Government Stockbroker to facilitate the diversification of investor base and trading of FGN Bonds on the floor of the Nigerian Stock Exchange.
B. The International Capital Market (ICM)
The DMO also established a visible competitive presence in the International Capital Market (ICM) through its debut issuance of USD500 million (10-year) 6.75 percent Nigeria’s Eurobonds in January, 2011. This was closely followed by the successful issuance of a USD1 billion dual-tranche Eurobonds offering on July 2, 2013, of USD500 million 5-year Bond and USD500 million 10-year Bond at Coupons of 5.125 percent and 6.375 percent, respectively.
The opening of access and establishment of the Nigerian sovereign bond in the ICM have helped to:
- Present Nigeria’s economic status and potentials to the international community;
- Provide foreign investors with requisite market information for investment decisions;
- Establish benchmarks for private sector issuers in the international capital market; and,
- To attract foreign direct investments.
How do I buy FGN Bonds?
Primary Debt Market: FGN Bonds Auctions Exercise is carried out by the DMO on a monthly basis. Primary Dealer Market Makers (PDMMs) empaneled by the DMO in 2006 are responsible for submitting bids for themselves and on behalf of their clients at the Auctions.
Secondary Debt Market: Trading in FGN Bond is done on a daily basis in the Secondary debt market by licensed broker-dealers (banks and stockbrokers) on the floor of The Nigeria Securities Exchange (NSE) and on FMDQ OTC Securities Exchange. The PDMMs are obligated to provide a two-way quote for FGN Bonds. This means that you can buy or sell your FGN Bonds whenever the need arises.
Who are Primary Dealer Market Makers (PDMMs)?
PDMMs are banks appointed by the DMO to act as authorized dealers in FGN bonds. Their major functions are to:
- Take up, market and distribute the Primary Issues of FGN Bonds.
- Make markets in FGN Bonds on request, through the provision of continuous and effective two-way quotes to all PDMMs and non-PDMMs on demand and in all market conditions. Click here to view a list of the PDMMs institutions.
Requirements to buy FGN Bonds
- Application forms can be obtained from any of the authorized dealers (PDMMs), or download from the DMO’s website New FGN Bond Tender Form
- Complete the application forms and submit through any of the PDMMs.
- Common-price auction system is normally employed as opposed to multiple price auctions.
- Payments for the allotment are payable in full on application.
- Minimum of N10,000.00 and multiple of N1,000.00, thereafter.
- Investors can also access the FGN bonds after the Auctions in the secondary market through any of the broker-dealers on the FMDQ OTC Trading Platform or through Stanbic IBTC StockBrokers on The Nigerian Stock Exchange (NSE).
- FGN bonds purchase is confirmed by electronic registration in the Central Bank of Nigeria’s Scripless Securities Settlement System or by issue of certificates, where required.
- Interest is paid semi-annually until the maturity date when the principal amount is repaid.
- Payment of interest is through issue of interest warrant (cheque) or direct transfer to current or savings bank accounts of the investor.
- Bond holders who do not want to hold the bonds until maturity date can sell them at any time on the floors of the NSE or through, FMDQ OTC Trading Platform.
If you decide to sell before maturity?
Investors need not to hold on to the bond until maturity. If you need cash anytime during the duration of the bond, you can sell your bond in exchange for cash. However, the portion of the interest that you are not entitled to earn because you have sold will not accrue to you any longer. You will only be entitled to the interest earned between the day of purchase and date of selling the bond.
For more information, visit